Episode 28 Payroll Calculation

How Much Should You Pay Your Employees? 

Another one of the most frequently asked questions among business owners. I always see this topic discussed in Facebook Groups of fellow business owners, and a question that is particularly important when you’re a first-time business owner or you’re looking to attract top quality employees.  

Am I paying enough to attract the best hires? What should I do? 

Naturally, every business and situation is unique to its own industry and geography. However, when you’re calculating payroll there are some things you definitely should not be doing.  

Never ask other business owners what they are paying their own employees of a similar job type or position.  

This might seem a bit counter intuitive, since on the surface it’s logical to base your own payroll on what other companies are offering for a similar role. But there is an integral piece of information that’s missing for the equation.  

Unless you can also see the full financial picture of that other business— income, expenses, and every other piece of their operating cost, you simply cannot place any context to the salary they pay employees.  

Calculate the salaries of your team based on your financials of your business. 

When you look at your payroll as your most significant expense, that needs to be in conjunction with all other sources of income and the larger financial picture of your organization.  

Of course, having an understanding of the average levels of pay in your area is a good idea, as the goal isn’t to be offering your people way less than they can earn elsewhere. However, competitive salaries aren’t the most important aspect of your compensation, and not even the place to start.  

What can you afford? That’s where you start.  

It’s never a good idea to pay someone for a position when you don’t have the money for it. Paying employees more than you can afford only places you in a corner where months down the road you may need to fire them.  

Similarly, you will want to avoid creating an environment where people will want to come work for you because you pay well. That can happen easier than you think. Once you start asking around what similar salaries are in your area, or nationwide, you may want to match, or just slightly increase those levels to make working for your company the better option.  

Sure, that’ll mean you are attracting more people, which means a wider variety to choose from… but it also means you’re attracting money-motivated people. If a competitor comes along that offer slightly higher salaries, those employees will leave— as their primary motivator isn’t tied to your culture.  

Those employees are not loyal, purpose driven, selfless, or the greatest team players.  

Look at your P&L and the financials of your business to determine your payroll comp.  

This Week’s Take Away 

Build your compensation plan based on your income and other expenses. Build out the payroll for your employees using your own company budget, and if you don’t have a company budget, then use this week to create one.  

Maybe you already have a structured payroll plan, and you have someone in mind you’re looking to hire soon… but you haven’t taken your budget into consideration.  

Ensure that the comp plans you have for your team and future employees are made in conjunction with your budget. This means your payroll is customized for your business, giving you the confidence that you can afford it and most importantly so you’re not attracting solely money-motivated people.